The sleepy valleys of Donegal used to nothing louder than the sound of fly fishermen casting lines could soon face a rush of Klondike proportions following a British company's announcement that important diamond reserves may exist there.

Cambridge Mineral Resources, based in Thetford, Norfolk, confirmed that it has located minerals closely associated with diamond and sapphire deposits near Malin Head in Donegal's Inishowen peninsula.

Suggestions that Europe's answer to Kimberley - South Africa's diamond- mining centre - may lie beneath their feet have created a stir among Donegal residents amid hopes of new prosperity. But some fear environmental damage in an unspoilt region with significant tourism potential.

The peninsula - population 30,000 - is one of the poorest parts of Ireland, dependent for employment on sheep farming, some fishing at the north end where the port of Greencastle is home to Ireland's fishing school. Inishowen suffers from being cut off by the border from its natural capital, Derry city. Its airport would be the main access route for overseas visitors.

Securing suitable mining labour should be easy. Traditionally many locals have left for work in Scotland and England. Emigrants from west Donegal and neighbouring Mayo have long provided "tunnel rats" to build motorways, drainage schemes and the Channel tunnel.

Locally, clothing giant Fruit of the Loom has a large factory in Buncrana on Inishowen's west side with a predominantly female workforce. Its satellite plant near Malin Head, in the main prospecting area, employs another 100 workers.

Bernard McGuinness, a publican and Donegal councillor from nearby Culdaff, said: "There is certainly a need for male employment. But I would be very concerned about our landscape. Inishowen is moving dramatically towards tourism, though we don't want to become 'neon-signed tourism' like Killarney. Donegal is unique in that it is not commercialised tourism; it is one of the unspoilt beauty spots. People are becoming more conscious of that."

He is suspicious that Cambridge has generated media coverage before local representatives were advised about mine plans. He says he would be unhappy at the mining firm's lack of consultation with local communities and would fear any open-cast methods that created large waste tips.

Mr McGuinness also fears that the embryonic Inishowen angling co-operative's plan to draw tourists to the noted salmon and sea trout fishing waters of the Crana, Culdaff and Owenkillew rivers could also be undermined by the impact of Cambridge's excavation.

"Anything that threatened that would not be tolerated. As far as I'm concern there are more jobs in that than there would be in mining," he said.

"The potential for tourism is massive. But after the ceasefire broke down last year 49 per cent of businesses here felt they had had a poor year in tourism. So in that way we are gasping for any support we can get," she said. " Diamonds, obviously, are a girl's best friend, so let's face it, nobody will say no if they can be extracted at reasonable cost, not only to the people but to the environment. Then it would be welcomed."

International excitement sparked by first hints of the gem-bearing minerals two years ago meant that all 180-odd Irish prospecting licences available were quickly snapped up, mainly by Canadian interests.

Cambridge's chairman, Bob Young, said early Inishowen test results were "absolutely astonishing" in highlighting kimberlitic and lamproitic rocks at all sample locations. These minerals, consistent with diamond and sapphire finds, were also present in Scottish sites where what he claimed "world- class" sapphires were discovered.

Electro-magnetic panning had demonstrated the same minerals were abundant in Inishowen. Small blue sapphires were found at one Donegal location, the company said.

It cites a 1995 study by the Geological Survey of Britain which indicated that areas in Ireland and Scotland contained basement rock of sufficient age and depth "to fit within the known window for diamond formation". Cambridge Mineral Resources is also prospecting in Sweden for diamonds and in Spain for emeralds.

Mr Young also predicted that if diamonds were found in commercial quantities it could generate substantial ancillary work, such as gem-cutting.

Following questions on the effect of mining on an area of outstanding beauty heavily reliant on tourism, Mr Young said site studies had not indicated the presence of chemicals such as uranium likely to result in harmful leakages. Separate plans to extract uranium in Donegal in the 1970s were abandoned amid widespread opposition.

Recent attempts to start gold mining in neighbouring Co Mayo met strong opposition amid fears that dangerous chemicals used in extracting metals could seep into the water table.

Cambridge's chief executive, David Bramhill, said his firm may shortly commission an environmental impact study to allay any local fears over the type of mining proposed.

However, local residents point out that this would hardly amount to a concession as it would be obligatory anyway.